Is the Stock Market Partying Like It’s 1999? | Lord Abbett
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Market View

As equities reflect optimism about innovation and economic recovery, naysayers continue a familiar refrain. Here’s why we think they are off base.

Read time: 5 minutes

“I was dreamin' when I wrote this
Forgive me if it goes astray
But when I woke up this mornin'
Could've sworn it was judgment day”

--Prince, “1999”

With the Dow Jones Industrial Average recently eclipsing 30,000 for the first time, and the S&P 500 and NASDAQ hitting fresh highs, a chorus of dystopian market forecasters have continued to  warn of doom and gloom for the equity market. The laziest among them point to the market froth of 1999 as the noteworthy parallel to today’s resilient equity performance.

Interestingly, many of these prognosticators have been singing this same refrain since the end of the Great Financial Crisis of 2008–09, arguing now in hindsight that they will still be proven correct (they’re just early) and that “judgment day” for market bulls is coming as it did in 2000-2002…at some point.

Yet if we focus on business fundamentals rather than speculative, bearish hunches, the outlook for select segments of the U.S. economy is both compelling and sound, in our view. We continue to see extraordinary gains from the technology revolution in many areas:

  • E-commerce continues to thrive, with a strong acceleration in adoption.
  • Cloud computing is seeing similar adoption as companies overhaul their IT infrastructure.
  • Biotech continues to experience tremendous growth thanks to the benefits of the genomics revolution.
  • Finally, artificial intelligence is augmenting the productivity and profitability of many industries.

What is more, we have seen “green shoots” of recovery in more cyclical industries that are not threatened by the displacement risks of innovation.

These examples differ greatly from the speculation of the 1990s, where disruptive new technologies were priced as though broad market adoption and profitability had already arrived rather than being a decade or two away.

So as we assess these strengthening areas of the economy and the equity markets at the tail end of 2020, we’ll address the concerns of the “dystopians” by highlighting three key distinctions between the market environments of today—and the tech-led “bubble” of 20 years ago.

2020 vs. 1999: Three Key Points

  1. The current environment suggests a more favorable outlook for risk assets.

In 1999-2000, the moment seemed invigorating, but there were dark clouds visible on the horizon. One could argue the opposite is true today. With the prospect of an end to the pandemic in 2021, along with a potential rebound in the economy, we think optimism for much stronger corporate revenues and earnings is justified. And the growth that ensues will most likely continue to be non-inflationary, we believe. It is worth noting the difference between interest rates today and the late 1990s and early 2000s. From November 1998 to May 2000, the U.S. Federal Reserve (Fed) raised the federal funds rate from 4.75% to 6.5% in order to cool off an overheated economy. Rhetoric from Fed policymakers turned increasingly hawkish in February 2000 as inflation rose to over 3% and the effective fed funds rate peaked at 6.53% in June 2000. Conversely, the fed funds target today is between 0% and 0.25% and inflation has been persistently below 2%. Moreover, Fed Chairman Jerome Powell has expressed more concern over deflation rather than inflation amid the COVID-19 induced recession, indicating potentially lower short-term rates for longer.

As for longer-term rates, the 10-year U.S. Treasury yield in January 2000 was 6.79%, whereas today it continues to linger below 1%.  Comparing that yield to the current earnings yield of roughly 4% on the S&P 500 supports the argument that that risk assets remain comparatively attractive, in our view.

Furthermore, low inflation tends to be favorable for longer-duration assets, such as innovation stocks, and it is worth noting that the Fed’s new policy of average inflation targeting limits scenarios where monetary policy would tighten compared to its previous framework. Against this backdrop, we think it is unlikely that we will see any near-term rate hikes, a markedly different situation than the series of tightenings in the late 1990’s.

  1. In 2020, the market has displayed greater fundamental strength.

Figure 1, below, illustrates another significant difference between today and 20 years ago by tracking the market value and sales-per-share of the S&P 500 Information Technology sector over the long term.  We can see that over most of this period the rate of growth in sales outpaced the rate of increase in the market values of those stocks. However, in the late 1990s, this relationship changed radically, with share prices soaring far ahead of the pace of increase in sales. In fact, we see sales flatten and then fall off substantially as the economy tilts into recession.  Conversely, today, we have seen a sharp, sustained surge in sales that reflects the much healthier environment for key areas of technology that play an important part in the U.S. economy.

 

Figure 1. Unlike 1999-2000, Tech Sector Gains Have Reflected Actual Sales

Sales per share (left axis) and market value (right axis) for the S&P 500 Information Technology sector, November 30, 1990–November 27, 2020

Source: FactSet. Data as of November 27, 2020. “Sales PS – LTM” refers to sales per share for the trailing 12-month period. “MV” refers to market value. Sales per share data covers the period December 30, 1994–November 27, 2020.

Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

  1. Today’s market features more rational valuations.

The other refrain we hear most commonly in attempting to draw parallels between today and 1999 is that equity valuations are once again out of whack.  Here again, when data is used rather than gut feeling, this argument falls flat. And there’s no better place to focus than technology, which was the epicenter of the collapse in 2000-02.While valuation multiples within the information technology sector today are modestly higher than that of the overall S&P 500 Index, they are anywhere between one-half to one-third of what we saw in the late 1990s and early 2000s, depending on the methodology used. For example, on March 10, 2000 (when the Nasdaq Composite Index reached its highest level of the “dot-com” bubble), the information technology sector’s P/E ratio was 68.6x, more than twice the current P/E ratio of the sector (as of November 23, 2020). It’s worth noting that the standard methodology for P/E ratios uses data “harmonization” techniques that limit the impact of extreme outliers. When that technique is eliminated, the weighted average P/E of the tech sector in early 2000 was 153.9x, compared to 45.6x today. The disparity between the weighted average in 2000 and the weighted harmonic average points to numerous stocks with severely extreme valuations within the index.

 

Figure 2. How Do Today’s Tech Sector Valuations Stack Up against the Peak Levels of the 1999–2000 “Dot-Com” Boom?

Price-to-earnings ratios at March 10, 2000 and November 23, 2020

Source: FactSet. Data compiled November 23, 2020. This chart illustrates the difference in valuations from (1) the date at which tech-sector valuations reached their highest level during the so-called “dot-com” bubble (March 10, 2010) and (2) and today’s market (as of November 23, 2020). Weighted harmonic average reflects the exclusion of stocks with extreme outlying valuations to more accurately represent sector valuations.

Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

In contrast to the height of the dot-com bubble, the rally seen in technology stocks today has been driven by stronger earnings and better profitability. Based on the price-to-earnings multiples stocks in tech and other strong sectors of the market, there is little empirical evidence to suggest that we are witnessing history repeat itself.

More broadly, we continue to believe that there will be distinct winners and losers from the technology revolution that is being powered by innovation, and we believe this is a critical time for investors to be selective in their equity portfolios. But we should at minimum put to rest the comparisons to the equity market’s overexuberant dot-com party of 1999. 

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

Glossary and Index Definitions

Earnings per share (EPS) is a company’s earnings divided by the number of shares outstanding. EPS can also be computed for an index such as the S&P 500.

Price-to-Earnings Ratio: Stock analysts calculate a price-to-earnings ratio by dividing a stock's current price by its earnings per share on a trailing 12-month basis. A forward price-to-earnings ratio is calculated by dividing a stock's current price by estimated future earnings per share.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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